A Surprising Lack of Fear

By

John Hughes and Scott Maragioglio

| Nov 13, 2012 | 1:21 PM EST

The market has been falling apart at the seams recently, but traders are not showing enough fear or bearish sentiment to signal that a capitulation stage has been reached. We have enough experience to know that the odds favor a continued decline until traders grow fearful and capitulate. We would consider a capitulation to be a spike in fear, as measured by a surge in the CBOE S&P 500 Volatility Index (VIX), in conjunction with an oversold condition in our indicators. The market has not reached this point yet, but we believe it is coming.

VIX -- Daily
Source: MetaStock
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For signals on spiking fear and extremes in sentiment that can be traded, we look for relative extreme moves in the VIX and in the CBOE Nasdaq-100 Volatility Index (VXN). If we see move in the VIX and VXN out past the 2-standard deviation band, that signals an extreme level of fear. We also confirm the move by looking at the seven-day rate-of-change indicator for the VIX and the VXN. Should we see the seven-day ROC move out past the 21 level, typically this means the VIX and VXN have moved to quickly to the upside. It should also signal short-term exhaustion in the volatility index....224 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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